Anatomy of a Currency Crisis

Anatomy of a Currency Crisis



Anatomy of a Currency Crisis


The case highlights South Korea’s 1997 crisis. It begins with the economic success that occurred in early 1990s, and concludes with the financial problems experienced in the late 1990s. It examines the possible cause of the problem, which was the excessive debts of many companies. The case highlights the role of different people in the crisis, including the president and the government, the country’s central bank, as well as domestic enterprise and foreign investors. The government had an influential role to play in the financial crisis as it failed to establish policies and measures that would have controlled or discouraged excessive borrowing. It failed to read the warning signs of an impending financial doom. The central bank could have chosen to deal with the main problem, which was mounting corporate debt, instead of focusing on the currency. The currency problem occurred because of the increasing debts, which discouraged foreign investors.

1. What role did the Korean government play in creating the 1997 crisis?

The president made a decision on behalf of the people and the government. The government encouraged the chaebol or the conglomerates to invest in new factories. The government did not place enough measures to control borrowing. The president seemed more interested in encouraging the industries that were dealing with exports to invest in the country. This encouraged the conglomerates to finance their investments using borrowed funds. This decision contributed to the economic downturn, which in turn decreased the value of the currency, leading to more demand for the dollar. The government looked at one way of addressing the recession problem. It did not consider using other monetary or financial policies, which would have propelled the country’s economy.

2. What role did the Korean enterprises play in creating the 1997 crisis?

The Korean enterprises contributed to the financial crisis. They did not use sound economic policies when doing business, but they seemed to rely more on the politicians. Their lack of perception contributed to them making poor financial decisions. They borrowed heavily to the extent that their debts exceeded their equity by far, and they could not be able to pay them. They decreased the quality of their investments as they seemed more concerned with growing the volume. This discouraged others to purchase their products. They failed to plan and research, and they made poor predictions. This contributed to some of the enterprises declaring bankruptcy.

3. Why was the Korean central bank unable to stop the decline in the value of the won?

The Korean central bank was unable to stop the number of foreign investors selling their stocks. Many of the foreign investors decided to sell their stake in the market once they realized that the conglomerates could not finance their debt. They sold the won in exchange of the US dollar. This led to an oversupply and ultimate depreciation of the local currency while it increased the demand for the dollar. The bank failed to look for a way to solve the growing debt problem, which was the main cause for the crisis. Had it done this, the conglomerates would not have had to declare bankruptcy, and they would have found a way to continue with their business operations profitably. This would have enabled them to pay their debts and the crisis would have been contained. Instead, the bank chose to focus on the depreciating won, and this did not solve the crisis.

4. In late 1997, the IMF stepped in with a rescues package that included $55 billion in emergency loans to support the currency. These loans had the effect of stabilizing the won, and over the next few years, South Korea enjoyed a strong recovery. If the IMF had not stepped in, what might have occurred?

The government could not have been able to stabilize the currency. The won could have continued depreciating, thus worsening the financial situation. People could have continued depending on the dollar. The people could have suffered economically because not all of them could have been able to afford to buy dollars. The government could not have been able to support its currency. The remaining investors could have withdrawn out of the country in order to prevent further losses. The IMF package enabled the country’s economy to recover. If Korea did not receive the assistance, then more industries would have closed, leaving many people out of employment. The problems that the country was facing, which included devaluation of the currency, excessive debts by different companies, bankruptcies and credit downgrading, would have made it impossible for the country to get assistance from other international financial institutions.

The crisis forced the country to make significant changes in its economy. Korea made changes based on IMF recommendations, in addition to other additional alterations that were not part of the IMF package. Had IMF not provided its support, the country could have probably continued with the same financial and monetary policies that had contributed to its economic downfall. It could not have adopted a floating exchange rate or reformed the banking sector. It would have probably not seen the need of controlling the traditional conglomerates and other monopolies or created a transparent corporate system that was free of corruption (Kim, 2000).


Hill, W. C. (2013). International business, 9ed. New York, NY: McGraw-Hill Higher Education

Kim, S. K. (2000). The 1997 financial crisis and governance: The case of South Korea. Retrieved from

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